Wrap around mortgage / Seller Financing

10 Replies

Well, I was all proud of myself that I had gotten a seller to accept seller financing on a property I felt would be a good long term investment..... now I come to find out he has a mortgage on the property, and wants to just accept my payments to him and use them to pay the mortgage. Doesn't his mortgage have a due on sale clause? What happens if we transfer title to me, I own the property, he still has his old mortgage, and the bank finds out? What are my risks here? I am not sure this is turning out the way I wanted.

I have been on the buying end of one wrap. The banks will most likely not enforce the dos clause but if interest rates go up in the future they might decide to start enforcing it so they get get higher rates. You can send the lender a letter stating your intentions if you wish. I pay the payment directly to the mortgage company this way I know that the payment is being made. You can use a note servicing company as well if you want. My lawyer preferred that I did not do a wrap but I did it anyway and it turned out ok. My big concern with this type of creative financing is that if down the road they call the call you have to have the cash to pay it off or you have to walk and lose whatever you have in it. I only buy houses now with owner financing for this reason.

Those were my thoughts as well.. because the mortgage is a lein, and even if the transfer title to me - if he stops paying it, or they call it, they can still foreclose on it and I am screwed.. I think I'll skip this one and look for a property that a seller owns outright.

Oooooo! The due-on-sale clause........(lol)

1. Give notice
2. Use a Special Warranty Deed subjet to the underlying financing.
3. Use a mortgage servicer
4. Read the Sub-2 threads here on BP.
You might find them from my profile, otherwise maybe Steve will save the day with links (lol)
This issue has been well covered.

In all the sub-2s I have done, not one has ever been called arising out of the sale, not one. That includes Wells Fargo and BoA, they have enough on their plate right now anyway. Good luck

Kim WRAPS in most markets are very common right now. It's one of the few ways deals are getting done.

A regular seller that has held onto the property for awhile might have some equity built up but not totally paid off.

In this case the seller wants and needs to sell.All cash buyers because of leverage want a VERY low price.This makes the deal unworkable for the seller.They will have to bring money to closing and pay closing costs and if listed real estate commissions.

This is the same reason buyers wanting the seller to hold a 15 to 20 percent second doesn't work many times. In this case the seller after holding a second will eat up most of their equity and and still have to bring money to closing.With the buyer getting 80 to 85 percent financing they will have no skin int he deal if it goes south.

So the WRAP with enough down allows the seller to cash out some equity with 15 to 20% down and pay closing costs and commissions and still come out ahead.Later if the buyer defaults the seller will most likely be in a better sales market than they are today.

You definitely do not want to pay the seller directly on these deals.You pay a third party note servicer.The note servicer makes sure payments are made on time which protects you the buyer and also protects the seller doing the wraps credit.Generally you set reserves with the note company of a few months.This way if the buyer pays late the servicer has a cushion to pay the lender on time.

You want to know what type of underlying mortgage there is.Is it fixed or adjustable and what is the interest rate?? As long as the senior mortgage doesn't adjust before your balloon is do you should be okay.

People with properties totally paid off will many times just reduce to land an all cash buyer unless they are trying to avoid taxes,etc.

Joel - do you have an example of a servicer that will do this? Do I have any risk involved in this in that case, other than if the bank finds out and calls the note to be due?

The loan can be called due in almost all mortgages these days.

The loans from 20 years ago or more generally didn't have this provision in there but you wouldn't want to assume those higher rates anyways.

I have heard of loans being called once per thousands or more so it is very rare but is always a possibility.There is risk in every investment you make.You can never eliminate risk just reduce it and try to control the type of risk that is acceptable for you to take with investing.

Here is the info Ive got on their current mortgage pulled from public records:

Mort Rec Date 12/31/1998 LenderName Union Federal Sav Bk Of Indianapolis
Mort Amt $73,862 Due Date 1/1/2029
Remarks: FHA

Forgot to mention I would also make them sign an affidavit warranting they are not behind on any escrow,or mortgage payments,nor have they received any default notices from their lender and that taxes are up to date.

You have to check for tax liens that supersede the senior mortgage and make sure all previous years of ownership do not have back taxes that were sold off.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here